After Sony’s price drop, all eyes turned to Microsoft expecting a similar response in kind. However Dean Takahashi, Mercury News reporter and friend of Redmond (he worked closely with the original Xbox team for his novel, Opening the Xbox) explains that Microsoft has something much larger in mind for the Xbox 360.

According to Takahashi, Microsoft’s battle plan, dubbed “Falcon” is about preparing chips that will use 65-nanometer specifications, instead of larger 90 nanometer ones now being used. By doing this, Microsoft benefits by having smaller chips that won’t generate as much heat, reducing warranty expenses, additional parts like heat sinks and would be cheaper themselves because as he explains – “use less material and fewer manufacturing steps to produce.”

Takahashi isn’t sure how “Falcon” plays into Microsoft’s larger strategy to win the console war but I can only see this as a move to allow Microsoft to fight “two wars” simultaneously with Nintendo and Sony. Since the Xbox 360 launched, Microsoft has spent over $21 billion to ensure their hegemony in the living room – for them, it seems losing is not an option.

Because of this attitude, I foresee any cost savings would likely materialize as price drops to sway consumers. There’s a reason why Microsoft didn’t discontinue their original Premium when they announced the higher-end Elite. Both SKU’s will be positioned with price drops that let MS go against both Nintendo and Sony in their respective markets and offerings.

Nintendo likely won’t be phased by this and shouldn’t be. With high margins on the Wii and a total monopoly in the handheld space, they’re positioned to easily weather the storm. Sony on the other hand with losing hundreds of millions on the Playstation 3 cannot afford the same luxury. Better luck next time, Sir Howard.